The State Bank of Pakistan has introduced climate-related stress testing measures for regulated financial institutions to strengthen risk management as climate risks intensify.
In a circular, the SBP said it has decided to roll out an additional set of shocks covering climate-related risks for banks, development finance institutions and microfinance banks. The move is aimed at enhancing the ability of financial institutions to assess and manage risks arising from climate change.
Under the newly issued Guidelines on Climate Stress Testing, regulated institutions will be required to apply climate-related single-factor shocks covering both physical and transition risks. The central bank noted that Pakistan is among the most climate-vulnerable countries, exposing its financial sector to rising climate-related threats.
As part of the framework, sample domestic systemically important banks (D-SIBs), identified under the D-SIBs Framework 2018, will be required to incorporate climate-related risks into their annual macro stress testing exercises. The guidelines are intended to help institutions assess the potential impact of climate risks on lending portfolios and overall financial positions.
The SBP said climate stress testing will be conducted in addition to existing stress testing requirements introduced under FSD Circular No. 01 of September 1, 2020. Financial institutions will carry out single-factor climate stress tests based on end-December data by the second quarter of the following year, with the first round allowed by the end of the third quarter of calendar year 2026 using end-December 2025 data.
D-SIBs will conduct annual macro stress tests based on audited financial statements as of December 31 and submit results, including climate-related scenarios, to the SBP by June 30 of the following year.
The central bank said it will also carry out its own in-house climate stress testing as part of the supervisory process and may engage with institutions on risk mitigation or contingency planning based on the outcomes. Supervisory teams may review the climate stress testing frameworks and processes adopted by financial institutions.
Separately, the SBP has issued a Regulatory Framework for Effective Management of Climate-related Financial Risks. The framework requires financial institutions to identify climate risk drivers and integrate climate-related financial risks into governance, business strategy and risk management systems.
All financial institutions are required to comply with the framework by June 30, 2029, and must submit board-approved, time-bound implementation plans and targets to the SBP by September 30, 2026.
